SPEECHES & TESTIMONY

Remarks of CFTC Chief of Staff Michael Gill at the National Press Club, CFTC Kiss Policy Forum, Washington, D.C.

February 12, 2018

Thank you. And, I want to thank The Risk Desk for hosting this forum.

The National Press Club has a long and distinguished history. It is an honor to speak here. The past is present in these rooms.

There have been many presentations over the last four decades here on the topic of the proper way to review regulations. You may know, thirty-seven years ago, almost to the day, there was much comment about President Reagan’s executive order on federal regulation (Executive Order 12291 dated February 17, 1981). The President wanted to streamline government by assessing the cost and the burden of regulations, to enhance agency accountability, to eliminate duplication, and to reconsider the reasoning behind specific regulations.

In reporting his views, the New York Times argued that the executive order “touched off an intense economic, political, and philosophical debate.”

Chairman Giancarlo does not seek to enter into a political or partisan debate. He simply believes there is a way to improve regulation, a positive approach in which every party benefits. The program we are discussing today, Project KISS or “Keep It Simple, Stupid,” begins with the premise that, no matter how well-intentioned, regulations should be periodically examined and questioned, brought out into the light, and those that are out of date, duplicative, or unnecessarily complicated should be updated or improved.

The KISS program evolved out of a simple list of cumbersome regulations that then-Commissioner Giancarlo and Amir Zaidi kept while Amir served as counsel to the Commissioner. At the time, Commissioner Giancarlo put it to Amir this way, “In most tasks in life there should be simplicity behind the complexity, and we must hone in on the practical to be successful.”

On February 24, 2017, President Trump issued an Executive Order on “Enforcing the Regulatory Reform Agenda.” Although the Commodity Futures Trading Commission (CFTC), as an independent agency, is not strictly bound by President Trump’s Executive Order, we believe the KISS effort is in line with the President’s objectives. That’s why we are here today, to tell you about our efforts at the CFTC to simplify our regulations and address outdated rules, and to bring some clarity to the process. I will provide some context. Then, we will have a panel discussion with my colleagues Brian Bussey, Amir Zaidi, and Matthew Kulkin.

Project KISS is an attempt to enhance the application of rules and practices in a policy-neutral way. We are working to make Legislative and Executive direction more effective and efficient.

This is a matter of necessary housekeeping; time to simplify and clean up the clutter. And, we found that, in forty years, we had accumulated a moderate amount of complex clutter.

The goal is to become better regulators, which in turn leads to more efficient markets and greater economic growth.

So, in addition to the staff led process, we invited public comments for suggestions. We opened a process to identify rules and practices that could become more simple and up-to-date. We set aside a separate page on CFTC.gov for these proposals. That way the suggestions would be transparent and would allow for a robust, accessible review and comment period.

Commentators included exchanges, asset managers, clearinghouses, trading platforms, think tanks, law firms, trade associations, and our own staff. Some of you are in the room with us, today.

There were a total of 149 comment submissions from the public and 51 proposals from staff. A breakdown shows that 35 submissions concerned registration, 37 reporting, 20 clearing, 20 executions, and 37 were in other miscellaneous categories.

We divided the responses into three categories:

  • Tier One is simple housekeeping with no discretionary policy changes;
  • Tier Two we classified as reducing regulatory burdens with minor policy implications; and
  • Tier Three is about initiatives that had more significant policy implications, and by our own definition, fall out of the KISS initiative. But these suggestions have not been cast aside. The Commission will also be studying ways to amend our regulations so that their effect more closely aligns with the intent of the Congress. These policy changes, however, are for another day.

The suggestions were then examined and discussed among staff and prioritized.

Before I tell you about some of the proposals, a few important caveats are in order. The first is the actions we are discussing today are but a start, there are many more rules we need to review, but the Chairman believes it is important to provide a guidepost on our efforts over the next few months. There are also specific efficiencies that will be incorporated into larger policy changes outside the KISS process. Many of the suggestions that came from the public will most likely be addressed in those more substantive policy reviews. The second caveat is that none of the proposals, after being considered and possibly amended after discussions with the full Commission, will be implemented straight away. Most will have a proper notice and comment period. Which segues into the third, and most important caveat, these proposals we will be discussing today are at the staff stage. The Chairman makes absolutely clear the Commission will be further reviewing these suggestions and providing input into their final design.

So let’s talk about what’s on the horizon.

Division of Clearing and Risk

The Division of Clearing and Risk (DCR) is considering recommending a proposed change to codify in regulation the process the Commission has followed in granting exemptions from Derivative Clearing Organization (DCO) registration. The benefits of this would be greater transparency in the DCO exemption process, making it easier for clearinghouses to seek an exemption; and reduced staff time and resources required to process clearinghouse requests for exemption.

Another proposed set of changes DCR is considering would involve amending various DCO regulations. For example, one change would codify an interpretative letter that gives DCOs some flexibility in determining when the customer margin “bump-up” rule – which requires customer initial margin to be greater than clearing member initial margin – applies. Another change would eliminate the requirement that DCOs petition for a Commission order when seeking to hold cleared swaps customer collateral in a futures customer account, allowing it to be done by rule filing, consistent with the process for holding futures in the swaps customer account. And another change would eliminate the need for DCOs that require full collateralization for positions to comply with certain risk management standards.

The benefits of these changes would include clarifying certain requirements for DCOs that may have caused confusion in the industry, and streamlining the process for comingling futures and swaps in customer accounts, (thereby saving DCO and Commission staff time and resources).

Yet, another proposed change would be to codify existing no-action relief through amendments to the Commission’s required clearing rules for certain small bank holding companies, savings and loan holding companies, and community development financial institutions to qualify for an exemption to the clearing requirement, and to codify existing no-action relief relating to an exemption for swaps between affiliates.

Further, DCR is considering recommending extensive proposed amendments to current Part 190 regulations based largely on a set of Model Part 190 Rules prepared by a subcommittee of the American Bar Association’s Business Law Section. Specifically, the amendments would revise and reorganize provisions that pertain to FCM liquidation, add explicit provisions that pertain to a DCO liquidation, clarify general provisions, and simplify standard forms.

The benefits would be updating the regulations to account for changes to the Commodity Exchange Act (CEA) and derivatives market practice since Part 190 was adopted in 1983; incorporation of lessons learned from the MF Global and Peregrine Financial Group bankruptcies; and reducing burdens on customers with claims.

Division of Market Oversight

Within the Division of Market Oversight, one proposed change would be to revisit, revise and re-propose guidance on peaking supply contracts, including to clarify that other similar customary commercial agreements are not swaps.

Another proposed change would be to codify the no-action letter DMO issued last year with respect to notice filing requirements under the final aggregation rule for position limits. This change would clarify when an entity must submit a notice filing to claim an exemption from aggregation of position limits.

This would provide clarity to the marketplace; streamline existing notice filing requirements; and reduce the number of notice filings received by the Commission, but still allow the Commission to conduct oversight over position limits aggregation.

Further, DMO suggested a revision to remove the applicable “hard coded” reporting levels under Part 15 (Large Trader Reporting Levels) from the regulatory text and instead publish such lists on the CFTC website, allowing staff to update, as appropriate, without requiring a rulemaking. Currently, a rulemaking is required anytime staff wishes to change existing reporting levels or add new commodities under the Part 15 reporting requirements. Further, new commodities listed by an exchange default to the lowest reporting level (25 contracts), which may not be appropriate.

Another proposed change is to reduce the timeline to complete designated contract market rule enforcement reviews (RERs) with an effort to streamline the process.

Several proposed changes would codify and improve several no-action letters with respect to the swap execution facility (SEF) rules in Part 37 of the Commission’s regulations. Staff previously provided no-action relief for SEF confirmation requirements for uncleared swaps, SEF error trade policies, and SEF audit trail requirements for post-execution allocation information. Staff will be proposing changes to these are other requirements as part of a SEF proposed rulemaking.

Staff will also be proposing several changes to swap data reporting rules as part of the Commission’s Roadmap to Achieve High Quality Swaps Data issued on July 10, 2017 and the CPMI-IOSCO harmonization process. These efforts seek to eliminate redundancy, streamline reporting, and harmonize internationally.

Division of Swap Dealer and Intermediary Oversight

Within the Division of Swap Dealer and Intermediary Oversight, several proposed changes would codify no-action letters for swap dealers related to trading activity. One would incorporate permanent no-action relief, some of which has been in place for years, into the regulations. For example, it would codify NAL 13-11 to allow swap dealers to allocate disclosure obligations to other swap dealers acting as executing dealers in prime brokerage transactions. Another proposal would codify NAL 13-70 to provide exceptions to business conduct and documentation requirements for swap dealers entering into “intended to be cleared swaps” on SEFs. Another swap dealer-related proposal would codify NAL 17-12 to permit SDs entering into swaps with separately managed accounts to treat each account of the same legal entity as a separate counterparty for purposes of applying a maximum Minimum Transfer Amount (MTA) of $50,000 per account.

These will eliminate inefficiency and possible compliance errors resulting from needing to locate and interpret letters not published in the Federal Register.

Related, we have identified several swap dealer business conduct standard rules where amendments, guided by our implementation experience or Project KISS comments, indicate efficiencies can be achieved. These changes would add flexibility for different types of swap dealers and simplify and clarify requirements. We would also simplify risk management rules (1.12 for FCMs and 23.600s for swap dealers) to allow more effective programmatic risk management rather than prescriptive policies and procedures that don’t apply for many registrants.

For example, we would modify quarterly reporting obligations in light of new National Futures Association monthly risk reporting. We would adjust risk unit reporting line requirements to accommodate different types of swap dealers. We would simplify segregation notice requirements to reduce burden and increase potential for more segregation. We would modify SD reconciliation requirements that overlap with reconciliation required by subsequent margin regulations.

In the FCM space, we would also take steps in line with these principles. We would codify no-action letters and staff interpretations regarding FCM’s receipt and holding of customer funds. Like swap dealers, we would eliminate duplicative filing requirements for segregation acknowledgment letters. We would revise required notices under Regulation 1.12 to place focus on significant regulatory matters. We would also modernize FCM record requirements to reflect the shift to an increasingly electronic environment. Finally, we would simplify risk management rules to allow more effective programmatic risk management rather than prescriptive policies and procedures that don’t apply for many registrants.

The benefits of these changes include eliminating duplicative filings and focusing regulatory notices on significant regulatory matters. It will allow FCMs, CFTC and DSROs to focus resources on mission critical matters and reduce costs. The purpose is to refresh regulations to reflect modern operating procedures resulting from technological and other advances and ensure regulations are periodically reviewed for sufficiency and relevancy.

With respect to our regulations for commodity pool operators and commodity trading advisers, we would amend certain Part 4 regulations to codify currently applicable staff letters regarding CPO and CTA registration relief such as for family offices (12-37 and 14-143), JOBS Act solicitation activities (14-116), and business development companies (12-40). While making those changes, we would also propose to fix erroneous cross-references, clarify terms, delete references to obsolete technology, and update provisions to include swap activity.

Next Steps

What next? Well, we still have a lot of assessment and implementation groundwork to do. Over the rest of this year, the staff will be recommending to the Commission specific action regarding many of the changes I have discussed today. Market participants and the public want a comprehensible, rational, and operable regulatory environment. A modern agency should seek to make compliance with its rules more straightforward, less costly and less complex. Surely, that is a reasonable expectation in an advanced digital age. We look forward to continued engagement with market participants and the public. Together, let’s keep it simple.

Finally, I want to plug another exciting project the agency will be undertaking under Chairman Giancarlo’s leadership. The CFTC and the Center for Risk Management Education and Research at Kansas State University will jointly host, “Protecting America’s Agricultural Markets: An Agricultural Commodity Futures Conference,” on April 5th to 6th, 2018, in Overland Park, Kansas. This first-of-its-kind conference will include robust presentations and discussions on current macro-economic trends and issues affecting American agricultural futures markets and the importance of these markets for managing risk and protecting participants from manipulation, fraud, and other unlawful activities. This is our first, and hopefully not last, conference focused on derivatives-markets issues impacting the agricultural community in America’s Heartland. I hope to see you there.

Thank you.

 

Last Updated: February 15, 2018